Cryptocurrencies Present More Risks Than Benefits, Says SBP Governor

KARACHI: Cryptocurrency has more risks than benefits, but the State Bank of Pakistan (SBP) has been working to develop an understanding of possible future currencies, according to SBP Governor Reza Baqir.

The central bank on Monday released the governor’s detailed speech he recently delivered at the annual Investment Forum in Riyadh, Saudi Arabia.

The governor said he believes these technologies have the potential to democratize finance and give people more power and control over their finances.

“In general, that’s a good goal,” he said, adding that that was also the intention and purpose of introducing private digital currencies that don’t require financial intermediation.

Dr. Baqir says private digital currencies are mostly speculative in their current form

“In Pakistan, as a central bank, we have come to the conclusion that for us and in terms of the fundamental objectives of the central bank, the potential risks far outweigh the benefits,” he said. declared.

Many large emerging markets, including China, India and Russia, have come to similar conclusions. At the same time, several advanced economies’ approach to these virtual currencies has been more permissive, he said.

Explaining the risks of cryptocurrencies, he said that in their current form, private digital currencies are mostly speculative in nature and have not provided any robust use cases or real economic benefits, especially for underprivileged countries. developed like Pakistan.

“Due to their speculative nature, their strong price fluctuations and, above all, their distributed and decentralized nature, they can pose a risk to financial and monetary stability,” he said.

After the global financial crisis of 2000-08, the world saw the emergence of so-called cryptocurrencies based on a new technology called Distributed Ledger Technology (DLT).

“One of the key elements of DLT is to disintermediate financial services and allow people to make payments without the need for a central ledger or financial institution, central ledger or a financial institution,” he added. “However, we see many variations of DLT, including permissionless and permissionless registries.”

As a result, the world is witnessing the issuance of a large number of DLT-based private digital coins/currencies. “By some estimates, there are over 17,000 different cryptocurrencies that have gained some influence, with a total value of over $2 trillion before the recent crash,” he said.

He said the world is also seeing financial innovation happen using this technology commonly referred to as decentralized finance or DeFi, which aims to provide financial services without intermediaries, using DLT protocols and stablecoins to facilitate fund transfers. .

There are certain advantages that these technologies bring; movement of capital and access to capital will become easier through innovations such as peer-to-peer lending and crowdfunding, he said, adding that it was also expected that cross-border transfers of funds would become more easy and less expensive.

“Due to their anonymous nature, some cryptocurrencies are susceptible to being used for illegal economic activities,” he said, adding that in such cases, for countries like Pakistan, there was a risk of expansion of the gray economy and capital flight.

Posted in Dawn, February 15, 2022

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